CENTRAL BANK'S GOVERNOR GIVES OPTIMISTIC READOUT OF

UNCLAS KHARTOUM 001482

SIPDIS

SIPDIS
DEPT PASS TREASURY FOR OIA,
DEPT FOR AF/SPG, EEB/IFD/OMA, EEB/ESC/ESP

E.O. 12958: N/A
TAGS: PREL PGOV EFIN ECON EAID PINR IMF SU
SUBJECT: CENTRAL BANK'S GOVERNOR GIVES OPTIMISTIC READOUT OF
SUDANESE ECONOMY

REF: KHARTOUM 1403


1. (U) SUMMARY: In a September 19 visit with EconOffs, the
Governor of the Central Bank of Sudan, Dr. Sabir Hassan, presented
an optimistic outlook of the Sudanese economy. Although Hassan
named U.S. sanctions, economic diversification, and poverty
reduction as challenges, he stated that the Sudanese economy
continues to grow and attract foreign direct investment (FDI).
Hassan also discussed the Central Bank's role in the implementation
of the Comprehensive Peace Agreement (CPA),the move away from U.S.
dollars for international transactions, and the emerging Sudanese
banking sector. END SUMMARY.

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KEY INDICATORS ARE POSITIVE
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2. (U) Hassan opened by reviewing the Central Bank of Sudan's
relationship with the International Monetary Fund (IMF) and recent
successes in macro-economic policy. Although Sudan is ineligible to
receive international financial institution (IFI) financing due to
its current debt arrearage, Sudan values the IMF's technical
assistance. The IMF's two major concerns are a lack of fiscal
discipline and Sudan's reliance on non-concessional borrowing. In
2006, Sudan (both the Government of National Unity in Khartoum and
the Government of South Sudan) had glaringly failed to restrain
expenditures when oil revenues fell short of forecasts. The new IMF
Staff Monitored Program (reftel) will seek to address this problem.
On the second concern, Hassan pointed out that Sudan has no choice
but to rely on non-concessional borrowing, since it is ineligible
for IFI financing. However, Sudan will seek to limit such borrowing
as much as possible. Hassan stated that Sudan has fulfilled the
requirements set for the IMF's Highly Indebted Poor Countries (HIPC)
initiative, and hopes it will become eligible for debt relief in the
near future.

3 (U) Hassan noted that Sudan's inflation rate decreased from the
double digits in the 1990's to single digits in the last several
years. (Note: The 2006 rate of inflation in Sudan was estimated at
7.2 percent.) Hassan also said that Sudan stabilized its currency
through a managed float system. He stated that over the last
several years the dinar has significantly appreciated against the
dollar, making non-oil exports less competitive, but that the FX
rate has stabilized in the last year. Hassan noted that he expects
the Sudanese economy to continue to grow at a rapid rate and to
attract Foreign Direct Investment (FDI). According to Hassan, Sudan
was the "second or third strongest country in Africa for attracting
investment."

4 (U) Hassan stated that Sudan has become dependent on oil revenues
which constitute 70% of total exports. Although he described the oil
industry as the "main engine of economic growth" he stated that FDI
has started to diversify to the telecommunications, transport, and
agricultural sectors. He added that the Sudanese agricultural
sector is "not growing at rates that we would like to see,
especially considering that our comparative advantage is in
agriculture." Although he considers agriculture to be a "risk
sector," Hassan asserted that there is great potential for
agricultural development in Sudan.

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BANKING SECTOR
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5 (U) According to Hassan, the Government of Sudan (GoS) has taken
measures to reform and improve the banking sector. The GoS
encouraged banks to merge, improve their profitability, and comply
with international banking standards (e.g. Basel II). He claimed
that the Sudanese banking sector attracted over $2 billion in
foreign direct investment, with many new international banks such as
Byblos, Capital, Salaam, and Emirates opening branches in Sudan in
the last several years.

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IMPLEMENTATION OF THE CPA
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6 (U) Hassan reviewed the Central Bank of Sudan's role in
implementing the Comprehensive Peace Agreement (CPA) through the
successful currency conversion from the dinar to the pound and
through establishing the Bank of Southern Sudan (BoSS). Hassan
described the BoSS as a branch of the Central Bank of Sudan with the
same board of governors, consisting of three representatives from
South Sudan and six representatives from the North. The Governor of
the BoSS is Deputy Governor of the Central Bank of Sudan and a
member of its board. Hassan said that there are currently three
branches of the bank of Sudan in the south. With the creation of
two additional branches, he asserted that "that should be enough for
the time being in the South."

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U.S. SANCTIONS
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7 (U) Hassan described tightened U.S. sanctions on Sudan as a

"serious problem." He stated that conducting transactions in
dollars has become more difficult. He added that the GoS has been
forced to use other currencies for international transactions. He
stated that they have not relied upon any single currency for
international transactions. He said that Euro and the Australian
Dollar are often used as alternatives, but that the choice of
currency depends on the region of the world and the entities
involved in the transaction. He stated that U.S. sanctions have
affected both the private sector and the government, and said that
he has seen how money can be confiscated by the Office of Foreign
Assets Control of the U.S. Department of Treasury. Although labeling
sanctions as "a serious problem," Hassan added that "the sanctions
will not stop life, there is always someone else to come and help."


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CHALLENGES AHEAD
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8. (U) Hassan described Sudan as a country blessed with huge
resources, but held back historically by bad economic policy. He
identified the most critical challenge as maintaining the political
stability needed to let good economic policies work. On strictly
economic issues, Hassan said Sudan must prudently manage its oil
revenues, so as to avoid the "oil disease" that has plagued other
countries. Then it must adopt policies that will spread growth and
prosperity beyond the confines of the Khartoum-Nile region to the
rest of the country. Another problem is that the efficacy of
resource transfers from Khartoum is constrained by a lack of
capacity elsewhere. The IMF plans to help Sudan develop a Poverty
Reduction Strategy Paper in 2008.


9. (U) Hassan concluded that he is "very optimistic about the
future of the Sudanese economy." Although the challenges of
economic diversification, U.S. sanctions, and poverty reduction
exist, he stated that he is confident that the Sudanese economy will
continue to grow.


10. (SBU) BIO DATA: Dr. Sabir Hassan was born in January 1945.
He graduated from Khartoum University in 1968 with a B.S. in
Economics, and in 1974 with a diploma in commercial law. He earned
both an MA and a PhD from Syracuse University in New York in 1982.
Hassan said that he has lived a total of 14 years in the U.S.,
either as a student or as an IMF staffer and that four of his
children are American citizens by birth. Hassan was open and
friendly and gave every indication of being favorably disposed to
the U.S.

FERNANDEZ